SIP Strategy for Index Funds: Optimum Investment in Two or More Index Funds?

When it comes to investing in index funds via Systematic Investment Plans (SIP), one common question arises:

Investing in Multiple Index Funds

There is often the misconception that diversification through multiple index funds can provide better returns. However, it is important to understand that diversification benefits are achievable with a well-constructed portfolio, and investing in numerous index funds may not necessarily enhance your returns. In fact, it can lead to unnecessary complexity and difficulties in tracking your investments.

For instance, consider the range of index funds available in India, such as NIFTY 50, NIFTY 100, BSE 100, and BSE 500. Investing in a single, well-performing fund within a specific index type, such as large-cap or mid-cap, is often sufficient and often offers better returns without the complications of managing multiple funds.

The Case for Opting for Two Index Funds

Based on your questions, the recommendation would be to invest Rs. 500 through an SIP in multiple index funds. This approach is highly effective for long-term investment. Here's why:

Reduces Overhead Fees: By spreading your investment across multiple funds, you can benefit from lower average management fees. Enhanced Diversification: Investing in multiple index funds can provide a broader exposure to the market, potentially reducing the risk of concentration. Easier Tracking: Managing a few funds is less cumbersome than tracking and reviewing numerous mutual fund schemes.

Example Scenario

Consider a scenario where you have an SIP of Rs. 500 per month distributed across two index funds:

UTI NIFTY 50 Index Fund: This fund is well-known for its performance and reliability. ICICI Pru NIFTY 100 Index Fund: Another reputable fund that complements the UTI NIFTY 50 index fund, offering additional diversification.

By investing in these two index funds, you can achieve a more balanced and diversified portfolio, which can potentially lead to better long-term growth.

Concluding Thoughts

In conclusion, while it is true that investing in one well-performing index fund can be beneficial, adding another index fund to your portfolio can provide valuable diversification and may lead to better long-term returns. With a SIP of Rs. 500 invested monthly across two index funds, you can strike a balance between reduced complexity and enhanced investment potential.